Could US tariffs undermine your sponsor covenant?
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High US tariffs – announced, then partially delayed – have rattled markets and raised fresh concerns for the real economy. For trustees, the question now is: could their scheme’s sponsor be at risk?
President Trump’s aggressive trade stance, particularly with export-heavy China, is pushing companies to adapt quickly. For defined benefit pension trustees, that means staying alert to any signs of sponsor strain.
“There is quite a lot to dig into, and sponsors will not necessarily know all the answers immediately,” said Karina Brookes, a partner in covenant advisory EY Parthenon. She encouraged trustees to engage early and understand their sponsor’s strategy for responding.
While the full impact of the tariffs is still playing out, some effects are already visible. Even if direct exposure is unclear, indirect risks—such as changes in customer demand, supply chain disruption, or currency volatility—could be significant.
Sponsors cannot control geopolitical tensions, but they can work on resilience. One area is liquidity. “Are there any areas of concern, are debt maturities coming up?” Brookes said.
If financial pressures grow, sponsors may seek to defer deficit contributions, as some did during the Covid-19 crisis. Trustees should be prepared. But with many DB schemes now better funded, the conversation may shift.
“If there is surplus, what would management like to do with it, would trustees need to get comfortable with that? And there is also soft surplus – expenses, discretionary increases,” said Brookes.
As employers might ask for these things incrementally, she recommends trustees should keep tally of how much they are giving away.
Meanwhile, the government’s efforts to make surplus extraction easier could face challenges. Recent market shocks have reminded trustees that DB security cannot be taken for granted.
Brookes said: “I’m quite supportive of looking at [surplus extraction] in a proper way, but you need to be really careful with it. You’ve got to learn the lessons from the past and put the right structures and parameters in place, so that downside risk is properly considered.”
President Trump’s aggressive trade stance, particularly with export-heavy China, is pushing companies to adapt quickly. For defined benefit pension trustees, that means staying alert to any signs of sponsor strain.
“There is quite a lot to dig into, and sponsors will not necessarily know all the answers immediately,” said Karina Brookes, a partner in covenant advisory EY Parthenon. She encouraged trustees to engage early and understand their sponsor’s strategy for responding.
While the full impact of the tariffs is still playing out, some effects are already visible. Even if direct exposure is unclear, indirect risks—such as changes in customer demand, supply chain disruption, or currency volatility—could be significant.
Sponsors cannot control geopolitical tensions, but they can work on resilience. One area is liquidity. “Are there any areas of concern, are debt maturities coming up?” Brookes said.
If financial pressures grow, sponsors may seek to defer deficit contributions, as some did during the Covid-19 crisis. Trustees should be prepared. But with many DB schemes now better funded, the conversation may shift.
“If there is surplus, what would management like to do with it, would trustees need to get comfortable with that? And there is also soft surplus – expenses, discretionary increases,” said Brookes.
As employers might ask for these things incrementally, she recommends trustees should keep tally of how much they are giving away.
Meanwhile, the government’s efforts to make surplus extraction easier could face challenges. Recent market shocks have reminded trustees that DB security cannot be taken for granted.
Brookes said: “I’m quite supportive of looking at [surplus extraction] in a proper way, but you need to be really careful with it. You’ve got to learn the lessons from the past and put the right structures and parameters in place, so that downside risk is properly considered.”
Watch leverage, not just exposure
The impact of US tariffs varies across companies, depending on sector and geography. Companies with a high exposure to the US are more vulnerable, said Daniel Lappage, a covenant specialist at XPS Penfida, speaking at a webinar organised by XPS on Wednesday.
Energy, consumer discretionary and tech sectors are among the hardest hit; financials, staples and utilities are less affected.
But it’s not just about where a company operates. Trustees must also understand how much leverage a sponsor carries.
“If a corporate can’t borrow and sponsors need to raise credit, it can cause a lot of strain,” he remarked.
Capital markets tend to feel the effects first, but the real economy isn’t far behind. Trustees may not need to rush into covenant discussions—but they should be prepared, especially as valuations approach. They should understand the employer’s need, whether it is financing or security, and put this into context. Negotiating “in real time” can be challenging, so there is a need for fully thought through solutions, he argued.
Crucially, they must ensure the scheme is treated equitably with other stakeholders in the company, as this is the approach the Pensions Regulator takes.
“The better the communication, the more likely you get to an optimal outcome,” he said.
Energy, consumer discretionary and tech sectors are among the hardest hit; financials, staples and utilities are less affected.
But it’s not just about where a company operates. Trustees must also understand how much leverage a sponsor carries.
“If a corporate can’t borrow and sponsors need to raise credit, it can cause a lot of strain,” he remarked.
Capital markets tend to feel the effects first, but the real economy isn’t far behind. Trustees may not need to rush into covenant discussions—but they should be prepared, especially as valuations approach. They should understand the employer’s need, whether it is financing or security, and put this into context. Negotiating “in real time” can be challenging, so there is a need for fully thought through solutions, he argued.
Crucially, they must ensure the scheme is treated equitably with other stakeholders in the company, as this is the approach the Pensions Regulator takes.
“The better the communication, the more likely you get to an optimal outcome,” he said.
A timely reminder
The recent turbulence is a clear reminder that the covenant underpins overall scheme risk, said Tom Austin, a director at consultancy Mercer. Trustees should consider if their reliance on covenant is increased by a deterioration in scheme funding, or higher volatility, he said. “Or has the journey plan been stretched out, extending the need for a covenant underpin?”
Heightened interest in financial resilience will come from both sides.
“Sponsors will also, no doubt, be keen to understand the scheme’s position as well, so this is a good opportunity to engage and understand one another’s perspectives as part of a collaborative approach,” Austin advised.
